Afterhours Trading, What Does the Term Mean?
A period of time after the market ends when an investor can still buy and sell securities outside of normal trading hours is known as afterhours trading.
The New York Stock Exchange and the Nasdaq Stock Market operate from 9:30 am to 4:00 pm Eastern Standard Time. But electronic trades can be completed in the off-hours session between 4:00 p.m. and 8:00 p.m. Eastern Standard Time. Potential buyers and sellers use these electronic communication networks (called ECNs), without the need to use a traditional stock exchange.
In this Noticias Diarias 24 article we will talk in more depth about afterhours trading, read on to learn more about this topic.
How does work?
This type of trading is different from main session trading. Afterhours trading is when instead of placing the order through an exchange, it is done through electronic communication networks (ECNs). These are digital networks that allow buyers and sellers to communicate with each other, trading securities without the intervention of third-party market makers that daily trading entails.
Because there are usually not as many after-hours’ traders, the markets tend to be more volatile and liquid. In addition, there are not as many stocks on offer and this, in turn, affects the price of the stocks that are available at that time of day.
To balance this situation, investors place limit orders on the stocks they buy. Limit orders consist of traders assigning a price at which to buy or sell a stock. When this price is met, it will automatically buy or sell.
The ECN matches orders based on these limit prices.
To begin after-hours trading, traders wait for the end of the main session of their preferred index.
After hours, traders will connect to their brokerage account that offers trading functionality through its platforms, such as the one offered by FXCM. At FXCM, you can participate in FTSE 100 after-hours trading every day between 00:00 and 20:00.
From there, you can select the stock you wish to buy and place a limit order. Your broker sends your order to the ECN you use, and the ECN attempts to match your order with a corresponding buy or sell order on the network.
Who can trade in the after-hours session?
ECNs became more available in the 1990s, causing afterhours trading to become more widely used, especially by institutional investors. Today, most investors can access these after-hours trades through accounts at brokers such as Charles Schwab, Fidelity, and TD Ameritrade.
This after-hours trading has become more popular in the last decade, thanks to the growth of electronic trading and the globalization of financial markets. The availability of technological tools in almost every corner of the world has contributed to the growth of these business areas.
In addition, ECNs not only allow individual investors to interact digitally, but also allow large institutional investors to interact anonymously, being able to hide their actions and movements if they wish. In this way, electronic trading is useful for individuals and insiders as well as institutional investors of scale.
When can I do this type of trading?
Afterhours trading is possible in three different sessions. These are:
- Pre-market trading.
Although we have talked a lot about the closing bell, it is possible to trade after-hours before the main session begins. This is known as pre-market trading and gives traders the opportunity to access the markets hours before they open.
This can be particularly useful if UK traders are looking at global exchanges and indices, so if you prefer to try trading the US stock markets, you will need to adjust to GMT time. For example, in the case of the NASDAQ, after-hours trading is based on Eastern Standard Time. In this case, the trading sessions before and after the market opening are from 04:00 to 09:30 and from 16:00 to 20:00 EST, i.e. from 09:00 to 14:30 and from 21:00 to 01:00 GMT.
This means that, while 4:00 am in the US is early, UK traders trade at a reasonable hour.
- Post-market trading
Post-market afterhours trading offers traders the ability to trade after the close of the main session. Again, this gives access to world markets at times that could come in handy for those based in the UK.
Weekend trading offers you the opportunity to take a position on a Saturday or Sunday. Traders who choose to trade over the weekend tend to use this time to cover weekday positions by taking positions over the weekend in the same market.
Are there risks involved in afterhours trading?
The development of afterhours trading allows investors to make large profits and achieve excellent opportunities. However, it also carries its risks and, which should be known by the investor for a more responsible and intelligent trading:
- Reduced funding. Since there are so many more buyers and sellers during normal trading hours, this happens. There might be less trading activity for equities during after-hours trading, and it might be harder to turn stocks into cash.
- Large spreads. Because there is less volume in trading, wide spreads between bid and ask prices can also be achieved. Because of this, it may be difficult for the interested party to get a favorable price for its transaction.
- Intense competition for individual investors. While it is true that individual investors now could intervene in these markets, it is true that they must compete against large institutional investors who have access to more resources than the average individual investor.
- The after-hours market trades less frequently than during regular trading hours. Therefore, you are more likely to experience severe price fluctuations in after-hours trading than during normal trading hours.
Why do this trading?
There are varied reasons for afterhours trading. The main one is that if something happens outside of normal trading hours that could affect a company’s stock price, it can be beneficial to those who are prepared to buy or sell at the right time.
For example, if a UK-based company went into receivership and the announcement came at 5pm, i.e., half an hour after the close of the main FTSE 100 trading session, the share price would be affected. The share price would, in the meantime, fall. In this case, investors might try after-hours trading, selling their shares in the company as soon as possible.
Timing is also the driving factor for the second reason why traders trade after hours. In this case, investors react to news that usually occurs before or after normal trading hours, such as company earnings reports. Prices can change dramatically following an earnings release or a change in an organization’s top management. To buy or sell as soon as possible depending on what you read with the information obtained on the internet, you will have to place an offer to buy or sell after hours.
In addition, on a practical level, it may make sense to trade after hours in global markets simply because the anti-social hours in the country in which trading takes place before or after the market are daylight hours in the country in which the investor is based. For example, U.S. markets open from 4 a.m. Eastern time, which is 9 a.m. in the United Kingdom.
What are the advantages of afterhours trading?
After hours trading carries several risks, but it also entails benefits and advantages. Here are some of them:
- Taking advantage of added information. The ability to trade after the close of traditional markets allows investors to react quickly to breaking news or any useful information they receive before the next day’s market opens.
- Pricing opportunities. Volatility and wide spreads can be a disadvantage, but attractive prices can also be found during this period.
- Some investors may prefer trading during off-peak hours, and after-hours trading provides this additional flexibility.
Conclusion on the subject:
This type of trading has developed and spread, so that any interested investor can do his afterhours trading. But we at Noticias Diarias 24 would like to remind you that it is important to keep in mind that some market characteristics change a bit during this period, which implies both advantages and additional risks.